Canadian manufacturing, forestry are still going through some major pain.

Real Estate market will continue strong until after HST is introduced in the summer.

How do these economic observations relate to the stock market in the short term, you might ask? My answer is nothing or it has very little effect. Now before you start flaming me and try to argue with me about fundamental analysis, Corporate earnings, P/E growth, etc. I believe they all have their places but I think investor psychology is a bigger driving force which over-rules the market in the short-term. When people are optimistic about a stock, they bid the price up. The same people will bid the price down when they are pessimistic. Some people say that external events are the main driver for psychology, but it’s really the interpretation of events that is the main driver. Time after time, we have seen the same event being interpreted differently depending on social mood. To totally understand investment psychology, one must also understand that human beings are driven by greed and fear. Greed takes over when a person sees a missed opportunity and will cause the person to chase after a stock. The mass effect will lead to an overshoot on the upside. Likewise, when the market falls quickly, fear will create panic selling causing an overshoot on the downside.

So where exactly are we in the stock market? It seems like people are pretty optimistic. However, that’s when one needs to be cautious. The market tends to reverse its course when there is a huge imbalance on one side, for example, the great bull run started in April when almost everyone you know were bearish. Am I calling a top here? Not at all. I think one needs to watch closely the USD movement. It will dictate how the stock market will move. Good Luck.